This paper reviews key findings of the IMF's Annual Report for the fiscal year ended April 30, 1971. The report highlights that the performance of the world economy during 1970 and the first part of 1971 was less than satisfactory in certain major respects. Performance was heavily dominated by developments in the larger industrial countries. The expansion of total world output proceeded at a slow and irregular pace, primarily because of the 1969-70 recession and ensuing moderate pickup of economic activity in the United States.

Foreign Exchange Markets

During 1970 and through most of the first half of 1971, short-term capital flowed virtually continuously and on a massive scale from the United States to Germany, Japan, the Netherlands, and the United Kingdom, and to a lesser extent to Belgium, France, Italy, and Switzerland. Relatively easy monetary conditions in the United States, compared with monetary conditions in other leading industrial countries, induced U.S. commercial banks to repay indebtedness to their overseas branches. Between November 1969 and early July 1971, U.S. commercial banks repaid over $13 billion of the total of $15 billion that had been borrowed from their overseas branches. This flow of funds was initially directed to the Eurodollar market, and interest rates for three-month deposits in that market fell from about 10.5 per cent per annum in January 1970 to about 5 per cent per annum in March 1971. Interest rates in the Euro-dollar market, while higher than those in New York, were relatively low, compared with interest rates in some of the leading European countries and Japan. Short-term rates in the countries of the European Economic Community and the United Kingdom averaged from 8 per cent to 9 per cent in January 1970 and were between 1 and 1½ percentage points lower in March 1971.

In the light of the improvement in the U. K. balance of payments and following the changes in the parities of the French franc and the deutsche mark in 1969, the pattern of exchange rates was relatively stable. The foreign exchange markets were generally calm throughout 1970 and the early months of 1971, except for a few weeks in June, July, and September 1970. Capital flows between the major money markets during this period were largely in response to short-term interest rate differentials. The bulk of the funds returned to the Euro-dollar market were converted on an unprecedented scale from U.S. dollar assets into local European money market assets, largely on an uncovered basis.

Although the size of interest rate differentials had begun to narrow considerably by March 1971, and action already taken by monetary authorities had reduced the incentives for funds to be shifted between the major money markets, the flows of international short-term capital accelerated markedly on expectations of changes in exchange rates. The flows of funds to Germany and to a number of neighboring countries were particularly large during April and the first few days of May. The change in expectations regarding the stability of exchange rates was, in part, brought about by the continuing accumulation of U.S. dollars by some central banks and, in light of the accumulation of external reserves, by widespread comment with respect to the difficulties for monetary authorities in absorbing further amounts of foreign exchange. Discussion of measures to combat the inflow of funds, including well-publicized recommendations that exchange rates should be permitted to float outside established margins, further added, to the speculative purchases of some currencies that began in March 1971 and intensified during April and the first few days of May.

Following the large-scale foreign exchange inflow in early May, the German authorities suspended official dealings in U.S. dollars and closed the official foreign exchange markets on May 5, 1971. Subsequently, the official exchange markets in Austria, Belgium, the Netherlands, Portugal, and Switzerland were closed. The monetary authorities of Finland, Greece, Norway, Singapore, and South Africa withdrew their support operations for the U.S. dollar and also suspended dealings in deutsche mark, Netherlands guilders, and Swiss francs. Other exchange markets, including those in Canada, France, Italy, Sweden, the United Kingdom, and the United States, remained open.

With the exception of Belgium, whose exchange markets were reopened on May 11, all other exchange markets were reopened or dealings resumed on May 10. Germany and the Netherlands decided that they would not, for the time being, maintain the exchange rates for their currencies within the established margins. Austria, after consultation with the Fund, changed the par value of the Austrian schilling, appreciating it by 5.05 per cent. Switzerland also changed the gold parity of the Swiss franc, an appreciation of 7.07 per cent. Belgium and Luxembourg modified the regulations concerning their free exchange market by prohibiting current payments to be made from free market accounts and requiring all capital payments to be transacted in the free market. In addition, advanced export payments were forbidden, and commercial banks were prohibited from accepting new time deposits remitted by nonresidents through the official market and from paying interest on similar sight deposits.

In response to the continued inflow of funds, the currencies of a number of European countries and of Japan had—for some time prior to the intensification of speculative activity—appreciated in the foreign exchange markets to near the normal upper intervention points. The only significant exceptions to the pattern of currencies being quoted through most of the latter part of 1970 at their upper intervention points were sterling, the Italian lira, and the Swedish krona.

The Canadian authorities at the end of May 1970 decided not to maintain for the time being the prescribed margins of 1 per cent either side of parity, and during the following year the exchange rate appreciated fairly steadily to a peak of Can$l = US$0.9971½ (a premium of 7.80 per cent above parity) in early March 1971. After declining slightly in March, the rate for the Canadian dollar remained fairly stable until it began to weaken in late May and through the middle of June; at the end of June it was quoted at Can$l—US$0.9775½ (a premium of 5.68 per cent above parity) ; it held steady at that rate through the first half of July.

As a means of reducing the rate of inflow of funds, the monetary authorities in Europe and Japan began to lower domestic interest rates in late 1970, while from about February 1971 interest rates in New York began to rise. However, earlier in 1970, a number of countries had introduced other measures to restrain the inflow of funds, especially those of a short-term nature. For example, the Japanese authorities from mid-1970 and through the first half of 1971 encouraged a shift in the financing of imports from U.S. dollars to yen. A number of countries, particularly Germany through the course of 1970 and in June 1971, and France in 1971, imposed reserve requirements on commercial bank foreign liabilities that were generally higher than those applied against domestic liabilities and thereby not only partly neutralized the inflow of funds but also effectively reduced the profitability of business financed by the acceptance of foreign deposits. Further, the payment of interest on deposits owned by nonresidents was restricted, for example, in Germany in May 1971. In the United Kingdom, exchange controls were tightened in the beginning of 1971 to restrict domestic borrowing of short-term funds from abroad. Other countries—for example, the Netherlands and Italy—require their commercial banks to maintain, or not exceed, a given net foreign liability/asset position.

In order to reduce the adverse impact of repayments of Euro-dollar borrowings on the U.S. balance of payments on the official settlements basis, the Federal Reserve Board in November 1970 and January 1971 amended its regulations regarding the maintenance of reserve requirements on Eurodollar borrowing. It raised from 10 per cent to 20 per cent the reserve requirements against borrowings in excess of the amount allowed as a reserve-free base; this base was redefined as the average daily borrowings in the four weeks ended November 25, 1970. The Export-Import Bank and the U.S. Treasury each issued $1.5 billion of short-term certificates of indebtedness to the overseas branches of U.S. commercial banks during the first five months of 1971 as a means of mopping up funds in the Euro-dollar market. The Federal Reserve Board permitted U.S. commercial banks to include these securities in their reserve-free bases.

In addition, the authorities of some countries, for example, those of Germany and the Netherlands, intervened in their forward exchange markets; in these two countries intervention was aimed at preventing the premiums on their forward currency quotations from rising. The Bundesbank also intervened on occasion to widen the discount on the forward deutsche mark. Forward market intervention tended to increase the cost of swapping funds into local assets, which not only discouraged the inflow of funds on a covered basis but also tended to deflect demand from the spot to the forward currency market.

Spot Foreign Exchange Markets

As can be seen from Chart 25 the general pattern of spot quotations in terms of the U.S. dollar for a number of leading currencies quoted in the New York foreign exchange market, shown as percentage deviations from their respective parities, was one of firmness throughout most of 1970 and the first four months of 1971. Between March 1970 and April 1971, the spot quotations for the Belgian franc, the deutsche mark, the French franc, and the Japanese yen were generally at or only slightly below the normal upper intervention points maintained by the authorities in their local markets. For the Belgian and French francs and the Japanese yen, these upper intervention points arev0.75 per cent above parity; the upper intervention point for the deutsche mark, up to May 5, 1971, was 0.82 per cent above parity. From early July 1970 the spot rate for the Netherlands guilder was generally quoted at a premium that varied between 0.65 per cent and 0.75 per cent of parity. As noted above, the comparative strength of these currencies in the exchange markets reflected the substantial inflows of short-term capital, which were characteristic of foreign exchange market activity throughout 1970 and the first half of 1971.

Spot sterling was quoted at a discount during the second half of 1970 largely because of the exchange market policies of the authorities in absorbing large amounts of foreign exchange, which were used for the repayment of inter-centralbank and other debts. A considerable outflow of funds occurred during September 1970, and, as a means of mitigating that outflow, the authorities let the rate depreciate quite sharply. Between December 1970 and January 1971, however, the rate appreciated to near the upper intervention point and remained there through mid-July 1971 in response to the inflow of funds and to the strong overall balance of payments position.

The intermittent weakness of the Italian lira was partly the result of a deterioration of the current account of the balance of payments but, more importantly, of the domestic labor and political situation which induced outflows of capital. As with sterling, the Italian lira showed relatively sharper fluctuations than most of the major currencies, as the authorities permitted the exchange rate to reflect the frequent changes in the direction of flows of short-term capital. The comparative weakness of the Swedish balance of payments, reflecting (inter alia) some outflows of capital that were influenced in part by the domestic labor situation, affected quotations for the Swedish krona at certain times. Except for the month of October 1970, when the Swiss franc eased to a premium of about 1 per cent of parity, that rate held very steady and was generally quoted at a premium of about 1.40 per cent of parity during the last quarter of 1970 and at about 1.60 per cent of parity until toward the end of April 1971 when it firmed sharply. The strong position of the Canadian dollar can be attributed to the large surplus on the current account of the balance of payments that more than offset the decline in the rate of inflow of long-term capital.

In the days following the announcements regarding the suspension of official dealings in U.S. dollars and of the closure of some official foreign exchange markets in Europe on May 5, trading in the New York market was based on nominal quotations for certain currencies—particularly the deutsche mark, the Netherlands guilder, the Belgian franc, the Austrian schilling, and the Swiss franc. Trading in these currencies was virtually at a standstill in London, Paris, Milan, and New York, even though these exchange markets were not closed on May 5. However, in New York the spot rate for the deutsche mark closed at $0.2802 (a premium of 2.55 per cent), compared with $0.2755 (a premium of 0.83 per cent) on May 4. The Belgian franc firmed to a premium of about 1.75 per cent, while the Swiss franc firmed appreciably to a premium of about 5.7 per cent above parity.

Following the reopening of exchange markets on May 10 and 11, 1971 the Austrian authorities decided to widen their intervention points from ±0.77 per cent of parity to ±0.97 per cent of the new parity. Following the revaluation of the Swiss franc the Swiss authorities widened slightly their intervention points from ±1.78 per cent and -1.76 per cent of parity to +1.82 per cent and -1.86 per cent of the new parity.

Conditions in the foreign exchange markets were comparatively calm following the reopening of the exchange markets. The flows of short-term funds between the leading markets were considerably reduced. With the exception of the Austrian schilling and, to a lesser extent, the Swiss franc, most currencies continued to be quoted above their par levels in terms of the U.S. dollar. Through the end of May 1971 there was little unwinding of the large foreign positions built up in deutsche mark, Belgian francs, and Netherlands guilders. In early June, however, there were comparatively large outflows of funds from Germany and the Netherlands; the outflows from Austria, Belgium, and Switzerland were, however, on a rather modest scale. Conditions in the Euro-dollar market were relatively easy, as the U.S. commercial banks continued to repay indebtedness to their overseas branches, although interest rates rose somewhat in May and then fell in June 1971.

As a result of continuing interest rate differentials, inflows of funds occurred, although on a diminished scale, to countries like the United Kingdom and France that had not experienced the heavy speculative pressures at the end of April and the beginning of May. Quotations for sterling and the French franc moved relatively little both during the period when some European exchange markets were closed and following the changes in exchange rates when the exchange markets were reopened on May 10 and 11. Throughout May and June they remained close to their upper intervention points. The Italian lira initially appreciated in terms of the U.S. dollar and then weakened through the remainder of May; in early June the rate was quoted at close to its parity level; it then strengthened during the latter part of June and early July. The Canadian dollar, which had risen to a premium of 7.80 per cent above parity in mid-March, weakened to a premium of 7.15 per cent in the last week of April and remained stable at around that rate through the last week of May, before declining sharply in the first week of June.

The Japanese yen, which was subject to substantial speculative buying pressure from April through mid-July 1971, was maintained at its upper intervention point virtually continuously. As a means of curtailing the inflows of funds, the Japanese authorities, apart from taking steps to prevent an increase, and even induce a decrease, in short-term foreign liabilities of the commercial banks, tightened their controls over foreign purchases of bonds.

During the last three weeks of May no apparent trend was discernible in the movement of the rate for the deutsche mark, which fluctuated at a premium between 2.25 per cent and 4.60 per cent above parity; foreign holders of deutsche mark were not, in general, prepared to sell, and the Bundesbank did not intervene in the market. On June 2 the Bundesbank intervened for the first time since the rate for the deutsche mark was permitted to float outside the established margins. On that day the Bundesbank offered to sell U.S. dollars at a rate of DM 3.5675 = US$1, a premium of 2.53 per cent above parity. Thereafter, the deutsche mark generally appreciated, reaching a premium of 4.72 per cent above its parity level on June 23. In the last week of June and early July, quotations moved within a narrow range at a premium of around 4.60 per cent.

Through the latter part of May and the first week of June, movements of the Netherlands guilder followed a similar pattern to those of the deutsche mark. The extent of the appreciation of the currency was, however, considerably less; the currency was quoted at a premium that varied between 1 per cent and 2.66 per cent above parity. From the end of the first week of June through early July, quotations for the guilder and deutsche mark have moved in different directions. While the deutsche mark, in general, appreciated, the guilder tended to weaken and moved within a range between 1.35 per cent and 1.57 per cent above parity.

The spot rate for the Belgian franc was quoted at its upper intervention point of 0.75 per cent above parity throughout the latter part of May and during the first week of June. In the following two weeks the rate weakened to a premium of 0.32 per cent and then strengthened to a premium of 0.76 per cent at the end of the second week of July. The rate for the “financial franc,” which was quoted at a premium of between 1.25 per cent and 1.50 per cent above the official par value until the end of the first week of June, weakened significantly during the last three weeks of June and early July and was generally quoted at a discount from the official rate, though at a premium over the par value. On July 6, 1971 the “financial franc” was quoted at a premium of only 0.03 above the parity of the official rate and then strengthened slightly in the second week of July.

Following the revaluation of the Austrian schilling, the spot rate for the currency was quoted at its lower intervention point, which is a discount of 0.97 per cent of parity. Some strengthening occurred during June and early July, with the currency being quoted at a discount of around 0.80 per cent of parity. The spot rate for the revalued Swiss franc opened at a discount of about 0.47 per cent of its new parity. The rate appreciated thereafter and on May 21, 1971 was quoted at a premium of 0.27 per cent of parity. The currency weakened during June and early July and moved within a relatively small range at a discount of about 0.40 per cent of parity.

Forward Exchange Markets and Interest Arbitrage

Quotations on three-month contracts for some of the leading currencies, expressed as annual percentages of their respective spot quotations, are shown in Chart 26. Quotations for forward contracts, which normally are left to the free interplay of market forces, were relatively stable until about March 1971 and broadly reflected a comparative stability in the pattern of spot exchange rates, as well as stability in the pattern of interest rate differentials, between the major money markets. For most of 1970 forward margins were close to their interest parities. Although the narrow spread between discounts and premiums for forward contracts, which was characteristic of the first half of 1970, was not maintained during the latter part of that year or the first half of 1971, there was not a great disparity between the premiums and discounts for various currencies in the year to June 1971. The widest spread occurred during the late summer of 1970, when interest rate differentials were at their largest and some uncertainty developed about sterling. With some narrowing of interest rate differentials between the leading international money markets toward the end of 1970, the spread of forward rates also narrowed.

A further factor that induced changes in forward rates during the second half of 1970 and early 1971 was the substantial official intervention, particularly in Frankfurt and Amsterdam. In general, official intervention was aimed at reducing the inflow of funds from abroad, by deflecting demand to the forward market and also by changing the relative profitability of shifting funds into local money markets on a covered basis. In this regard, the authorities were concerned to limit the rise in premiums or to maintain or widen discounts on forward contracts. On occasion, however, the fall in interest rates in the Euro-dollar market outweighed the effect of the reduction of the forward premium or the increase in the discount on forward quotations and encouraged inflows of funds on a large scale. Further, from about March 1971 a marked rise in forward quotations occurred, largely as a result of a change in expectations regarding the stability of exchange rate relationships but also, in part, because of a lessening of official intervention in the market.

At times, particularly between June and September 1970 and intermittently between February and April 1971, the Bundesbank was active in the forward market and purchased forward U.S. dollars with deutsche mark. In June 1970 the Bundesbank announced that it would purchase U.S. dollars for 90-day delivery at a fixed rate of DM 3.6330 = US$1. This was the first occasion that the Bundesbank had intervened in the forward market since the revaluation of the deutsche mark in October 1969. In late February 1971 the Bundesbank, in collaboration with the Federal Reserve Bank of New York, intervened in the forward market. As a result of these operations, the discount on three-month forward deutsche mark widened during February 1971 from 0.81 per cent per annum to 1.43 per cent per annum. The widening of the rate for three-month deutsche mark, however, was insufficient to induce an outflow of funds from Germany because of the decline in Euro-dollar rates. During April 1971 the Bundesbank undertook large-scale forward market intervention; on April 28 it ceased to buy forward U.S. dollars at a rate of DM 3.6300. After the decision to float the deutsche mark, the forward premium increased from about 2 per cent per annum to 4.1 per cent in early June. During the remainder of the month the rate for forward deutsche mark weakened and on June 23 fell to a discount, the first since early April 1971; at the end of June the forward currency was quoted at a discount of 0.45 per cent per annum, but it rose to a premium in the second week of July.

The Netherlands Bank intervened in the forward market by linking intervention on the spot foreign exchange market to that on the forward market. For example, in swap transactions with the commercial banks it would buy spot dollars at a rate of f. 3.5975 = US$1, a premium of 0.62 per cent of parity, in exchange for three-month dollars, which would be resold at varying rates below the purchase price. The Netherlands Bank also made spot purchases of dollars against forward sales at an agreed rate. Following the decision to float the guilder, the forward rate appreciated to a premium of 3.10 per cent per annum on June 2, 1971. Thereafter, the currency weakened in the forward markets; by mid-July it was quoted at a premium of 1.93 per cent per annum.

In June 1970 the three-month sterling rate was quoted at a slight premium for the first time since 1963. Thereafter, the rate was quoted at a discount, which in September 1970 reached 2.83 per cent per annum, at a time when there was pressure on the spot rate. The substantial discount on forward sterling in early 1971 also reflected increased borrowing of sterling on a swap basis as the spot rate rose and the disparity between interest rates in the United Kingdom and abroad increased. With the continued upward pressure on the spot rate, the slight relative fall in domestic interest rates, and the change in expectations in the exchange markets, the discount on forward sterling narrowed sharply between April and mid-July 1971, reaching a discount of 0.44 per cent per annum.

The movement of the rate for forward Swiss francs mainly reflected technical adjustments associated with end-of-month window-dressing operations of the commercial banks and the comparatively low level of domestic interest rates. Toward the end of 1970 the premium on the three-month forward rate for the Swiss franc eased markedly, partly in view of the increased liquidity requirements of the commercial banks. The rate declined from a premium of about 3 per cent per annum in October to a premium of about 1 per cent per annum in the middle of December 1970. Thereafter, the rate held comparatively steady until early March, when, as with other forward rates, it appreciated sharply. Following the revaluation of the Swiss franc effective May 10, 1971, when the spot rate was quoted a substantial discount, the forward premium increased to 3.39 per cent per annum before declining to a premium of 2.13 per cent by mid-July 1971.

The rate for the forward French franc was comparatively stable at a small discount on its spot rate. Movements in the forward rate were caused mainly by changes in interest rate differentials. The forward Canadian dollar was consistently quoted at a premium in terms of its spot rate, except for the early months of 1971; it appreciated sharply in March and April 1971.

Covered interest arbitrage was less significant in determining the movements of funds in 1970 and early 1971 than in previous years. Further, the relatively sharp decline in Euro-dollar deposit rates relative to interest rates in domestic European money markets, as well as the small discounts or premiums on forward currencies, resulted in interest arbitrage investments being generally in favor of investments in the local money markets rather than in the Euro-dollar market, after taking into account the cost of forward cover. However, on the basis of covered interest, there was little incentive to invest either in Switzerland or in the United Kingdom. The largest fluctuation in the covered interest arbitrage schedule occurred in Italy, where, owing largely to the improvement in the forward rate for the Italian lira, the margin of profitability of placing funds in the Euro-dollar market over domestic investments was sharply reduced, until in October 1970 it became more profitable to invest in local money market instruments than in the Euro-dollar market.

Gold

The leading international gold markets were generally calmer during most of 1970 and the first four months of 1971 than at any time since the months preceding the devaluation of sterling in November 1967. However, at the end of April and beginning of May 1971, largely associated with developments in the foreign exchange markets, speculative activity in the gold markets increased, and prices rose to their highest levels since August 1969, reaching more than $41 a fine ounce in mid-May.

During the first eight months of 1970 the market price of gold in London was fairly steady at close to the official level of $35 a fine ounce; the highest price during this period was $36.24 an ounce at the beginning of May 1970. Prices began to rise in August 1970, mainly reflecting a relative increase in demand, as the sales of gold on the market by South Africa were substantially larger in the second half of 1970 than in the first half of the year. However, a short-lived burst of speculative activity between late September and October resulted in prices first rising then falling by about $2.50 a fine ounce. Thereafter, prices rose gradually until mid-January 1971. The relative calm in the international monetary situation was reflected in the price of gold in the private market, which averaged $35.96 an ounce in 1970 compared with $41.11 in 1969. Prior to the sharp rise in prices during late April and early May, when prices rose to $41.20 an ounce, the average price since the beginning of the year had been $38.60 an ounce. For the first six months of 1971, the average price of gold was $39.19 an ounce.

With the exception of a few weeks in April and early May and again in late September and in October 1970, speculative activity in the gold markets was relatively low; markets were, in general, orderly with supplies adequate for a modest demand. As can be seen from Table 41, industrial and artistic consumption of gold during 1970 has been estimated at about the equivalent of $975 million, compared with the equivalent of $915 million in 1969.1 The rate of growth of demand for gold for industrial and artistic uses between 1969 and 1970 has been estimated at between 6 and 7 per cent, which is somewhat lower than the annual average over the past decade. To a considerable extent, the reduction in the rate of growth of demand, which was particularly marked during the first half of 1970, was accounted for by the slowdown in economic activity in some of the major industrial countries like the United Kingdom and, especially, the United States, where industrial consumption of gold was estimated to have declined by 20 per cent from the levels reached in 1969. In addition, industrial and artistic users tended to run down existing stocks in the earlier part of 1970 when prices were weak. Stocks were only partly rebuilt later in the year. However, the demand for gold from countries of the Far East and, to a lesser extent, from countries of the Middle East increased markedly during 1970. To some extent the increased demand was associated with an increase in the minting of gold coins and unsettled conditions in Southeast Asia.

With the relatively low level of speculative activity in the markets during 1970 and early 1971, the amount of gold estimated to have been absorbed in the form of hoarding declined sharply, compared with 1969 and earlier years. It is difficult to substantiate the likely causes of the decline in the demand for gold for hoarding purposes, but it would seem likely that the decline in speculative activity in the market can be attributed in part to a change in expectations regarding a possible increase in the official price of gold. The change in expectations was, to some extent, a consequence of the relative calm in the foreign exchange markets and also of the activation of the special drawing rights scheme in January 1970. In addition, the relatively high level of interest rates in the international money markets might also have induced a shift in investors’ preferences in favor of interest yielding assets. The relatively high opportunity cost of holding gold is also likely to have encouraged dishoarding, particularly in view of the lower gold prices during 1970, compared with most of 1968 and 1969.

World gold production in 1970, excluding the output of CMEA countries, mainland China, etc.,2 reached a new peak of 41.5 million ounces, the equivalent of $1,450 million valued at $35 a fine ounce; this represented an increase of 0.7 million ounces, or about 1.8 per cent, over 1969. The increase in gold output resulted mainly from a rise of 3.4 per cent in South African production. In 1970 South Africa accounted for about 78 per cent of world production. No sales of gold by the U.S. S. R. on the international gold markets were reported in 1970, and mainland China, which had bought relatively small amounts of gold in previous years, is believed not to have purchased any during the year. During the first quarter of 1971, the current production of gold is estimated at the equivalent of $355 million. It was also reported, but not officially confirmed, that the U.S. S. R. resumed its sales of gold on the private markets for a few months in early 1971, at a rate of about 10 tons a month, equivalent to $9.2 million.

The volume of newly mined gold sold on the private markets during 1970 is estimated at 33.6 million ounces, or the equivalent of $1,175 million at $35 a fine ounce; despite increased gold production, this was about $123 million or 10 percent smaller than during 1969. South African sales on the market amounted to about $914 million, or over three fourths of total sales during 1970. Official gold stocks of national monetary authorities and international institutions increased by the equivalent of $275 million during 1970, compared with an increase of $110 million in 1969. However, the amount of gold being offered for sale on the private market during 1970 was larger than the sales of newly mined gold as a result of the running down of stocks held by industrial and artistic users, especially in the United States and some other industrial countries, and also by other holders who divested themselves of gold purchased mainly in late 1967 and early 1968. It is probable that the liquidation of this speculative overhang of gold that had been bought earlier from official stocks was virtually completed in the course of 1970 and early 1971. It is likely, therefore, that the amount of gold used during 1970 for industrial and artistic purposes was higher than the estimates shown in Table 41, because of the rundown in stocks; demand for gold by countries of the Middle and Far East might also have been met partly from a rundown in stocks. During the first quarter of 1971, about 10 million ounces of newly mined gold was sold on the private markets.

The rise in official gold holdings can be attributed largely to the sales of gold to the Fund by South Africa. The Fund purchased the equivalent of $640 million in gold from South Africa during 1970 in accordance with its decision of December 30, 19693 and purchased a further $138 million in the period January 1 to July 2, 1971. (See Chapter 3 and Supplementary Note A.)

Most countries’ gold reserves fell during 1970, largely as a consequence of the payment to the Fund of increased gold subscriptions resulting from the increase in members’ quotas. However, the fall of $450 million in South Africa’s gold reserves was a result of its balance of payments deficit; South Africa’s quota increase became effective in July 1971. Declines totaling $787 million occurred in official gold holdings of the United States, in large part as a result of transactions with the Fund, which also led to a reduction in the United States’ gold liabilities. Spain’s gold reserves fell by $286 million, largely as a result of a sale of gold to the Bank for International Settlements.

Only relatively few countries recorded increases in gold holdings during 1970; Japan, Switzerland, the Netherlands, Portugal, and Turkey showed the largest increases. The Fund’s gold holdings (including its general deposits of gold) increased by $2,029 million during the year.

Gold Production

As noted above, gold production in 1970, excluding the output of CMEA countries, mainland China, etc., amounted to the equivalent of $1,450 million; the previous production peak was reached in 1966 when the equivalent of $1,446 million of gold was mined (Table 39).

Gold production in South Africa increased to 32.2 million ounces (equivalent to $1,128 million) in 1970, an increase of 3.4 per cent over 1969. The rate of increase of output was the highest since 1965 and resulted mainly from the resumption of working of the country’s largest gold mine, West Driefontein, following its extensive flooding in 1968. Production at the new Kloof mine, which began operations in 1969, also increased substantially. Further, the shortage of labor, which had hampered production in 1968 and 1969, was alleviated during 1970 with a consequent increase in output. The increase in gold output in 1970 resulted almost entirely from the extraction of higher-grade ores, as the tonnage milled in 1970 was slightly smaller than in 1969.

The rise in the grade milled in 1970, to an average of 13.28 grams per ton milled from 11.91 grams per ton milled in 1969, was partly a consequence of the lower private market price of gold, compared with 1968 and 1969, and the smaller premiums paid to the mines. According to reports of the Chamber of Mines of South Africa, these premiums amounted to the equivalent of $37.1 million in 1970, or less than half of the amounts paid in 1969. The milling of higher-grade ores in 1970 partly compensated for the lower premiums paid to the mines. Working costs rose by 6.2 per cent from $23.03 a fine ounce in 1969 to $24.46 a fine ounce in 1970. The amount of gold produced at a loss increased to 8.7 per cent of total production in 1970, compared with 5.4 per cent in 1969 and 3.5 per cent in 1968. The combined working profits of the mines during 1970 amounted to the equivalent of $418 million, a decline of about 8 per cent from the 1969 level of $455 million.

Two mines were closed during 1970, and a number of other mines are likely to close in the near future. The ten largest producers experienced an above-average increase in profits during 1970. The output of these ten producers accounted for 49 per cent of total production in 1970, a slight increase from the previous year. The higher rate of extraction in West Driefontein, Kloof, and Elsburg was particularly noteworthy. The ten largest gold mines also accounted for 65 per cent of the total profits of the members of the Chamber of Mines in 1970, compared with 61.5 per cent in 1969. At the same time, the average of working costs for these ten producers was $15.68 a fine ounce, compared with the average for all members of the Chamber of $24.46 a fine ounce.

With regard to the future trend of output in South Africa, it is difficult to assess the effects of an acceleration in production costs and the problems of mining lower-grade ores against the effects of private market prices on output and exploration. However, new mines, such as East Driefontein and Vaal Reef South are due to come into full production over the next few years; this should tend at least to maintain output. Further, increased demand for uranium, which is a by-product of gold production in South Africa, and new technological developments will help sustain profitability and output over the next few years.

In the United States gold production in 1970 increased by 3 per cent over 1969 to 1.79 million ounces ($63 million). The increase was attributed principally to the increased production of copper, of which a substantial part of the gold produced in the United States is a by-product.

Gold output in Canada and Australia continued to decline in 1970. Production in Canada, the second largest producer, was 2.34 million ounces ($82 million) in 1970, compared with 2.55 million ounces ($89 million) in 1969. After recording a postwar peak of the equivalent of $160 million in 1958, Canadian gold production has steadily decreased. In Australia gold production dropped by 12 per cent to the equivalent of $22 million in 1970 from $24 million in 1969, despite the continued subsidization of output. In the past two years the subsidy has been $1.8 million a year. Gold production in 1970 in most other countries was almost the same as in previous years (Table 39).

Gold Holdings

Official Holdings

The recorded gold holdings of national monetary authorities (excluding CMEA countries, mainland China, etc.) and international organizations increased by $275 million during 1970. This was the second successive year in which official gold holdings increased, and the increase contrasts with substantial falls in official gold holdings in 1966-68 (Table 40 and Chart 27).

The rise in official gold holdings largely reflected South Africa’s transactions with the Fund, which, as noted earlier, purchased the equivalent of $640 million of gold from South Africa during 1970. The effects of these sales of gold to the Fund on the total of official gold holdings were, however, partly offset by the fall in South Africa’s official holdings by an amount equivalent to almost $450 million.

Gold holdings of national monetary authorities fell by the equivalent of $1,950 million during 1970. This fall resulted mainly from increased gold subscriptions paid to the Fund and from other Fund-related transactions. Details of the Fund’s gold transactions are given in Chapter 3 and Supplementary Note A. Gold holdings of the Bank for International Settlements also increased, largely as a result of a substantial purchase from Spain.

During the first quarter of 1971, official gold holdings fell by $35 million, due almost entirely to a fall in South Africa’s gold reserves.

Private Absorption

Private net absorption of gold for industrial and artistic use and to meet hoarding demand during 1970 was, at 33.6 million ounces, the equivalent of $1,175 million at $35 a fine ounce, the smallest amount since 1964. In 1969 private net absorption was estimated at 37.6 million ounces, while in the two previous years of intense demand for gold, private net absorption of gold totaled 144.8 million ounces ($5,069 million).

Estimates have been made of the amount of gold absorbed for industrial and artistic use. As was pointed out in the Annual Report, 1970, the estimates are subject to a considerable margin of error, and the distinction between the use of gold for industrial and artistic purposes and for private hoarding is blurred. The estimates for industrial and artistic use of gold, shown in column C of Table 41, have been revised from those shown in last year’s Annual Report. The revised estimates show a slightly larger amount of gold used for industrial and artistic uses than was shown formerly. For 1970 the estimated consumption of gold amounted to 67 per cent of world output and 83 per cent of the total supply of gold placed on the market in that year.

The revisions have been based on more detailed estimates for a larger number of countries submitted to the Fund. They cover 80 countries, of which 45 submitted information during 1970. When such information was not available to the Fund, the estimates were taken from the U.S. Bureau of the Mint series on private and industrial consumption of gold. Information is not available for all countries for the whole period; for those years for which data are lacking, the available data for each country were regressed on the statistics of real or money gross national product. Estimates have been made for almost all the large industrial countries, but little information is available for some of the larger primary producing countries. For the latter, estimates have been based on statistics of bullion exports recorded by other countries.

Industrial and artistic consumption of gold in 1970 is estimated at about $975 million, compared with a revised estimate of $915 million in 1969. The rate of growth of demand in 1970 is put at between 6 and 7 per cent, compared with an average annual rate of growth of about 9 per cent over the last decade. As noted earlier, the lower rate of growth of demand for industrial and artistic use during 1970 was due in large part to the decline, equivalent to about 20 per cent, in demand in the United States, which is the largest single consumer of gold and which normally accounts for about one fourth of total estimated consumption. The rate of growth of demand also fell in Switzerland and, to a lesser extent, the United Kingdom. However, demand for gold from the traditional hoarding countries of the Middle and Far East increased substantially. During the first quarter of 1971 the rate of growth of demand for gold for industrial and artistic use increased, particularly in North America where stocks were rebuilt.

The decline in gold consumption in some of the main industrial countries during 1970 can be attributed partly to the slowdown in their overall economic activity, particularly in the United States. In some countries the slowdown was associated with a decline in the aerospace and defense industries, which are substantial users of gold; further, the decrease in the rate of growth of real disposable income importantly affected the demand for gold jewelry in a number of countries. In a relatively large number of countries, especially in Western Europe, consumer demand for gold was satisfied by running down private stocks, which had been built up in previous years.

Other private holders of gold, particularly in Western Europe, tended to be net sellers during 1970, and it is likely that private stocks in the main industrial countries are now smaller than at any time since the gold crisis of late 1967 and early 1968. The speculative overhang of gold that was built up at that time, estimated at about the equivalent of $3 billion, would seem to have been largely worked off in meeting consumer demand and the demands of the traditional hoarding markets in the countries of the Middle and Far East.

While there was a slowdown in the rate of growth of demand for gold for industrial and artistic use during 1970, the decline in the total amount privately absorbed resulted from a continued fall in net hoarding demand, especially in the main industrial countries. In the estimates of private absorption shown in Table 41, private hoarding is a residual, calculated by deducting estimated industrial and artistic demand from the net supply of gold placed on the private markets. For 1970, hoarding demand is estimated at the equivalent of $200 million, compared with estimated new hoarding of $383 million in 1969. This was the smallest estimated volume of gold absorbed into private hoards since the mid-1950s. During the first quarter of 1971, however, estimated private hoarding demand increased relatively sharply.

Gold Movements

Official gold movements during 1970 were dominated by members’ gold transactions with the Fund. In gross terms the Fund acquired the equivalent of $2,911 million of gold and disbursed to members the equivalent of $944 million. As has been noted elsewhere in this Report, the relatively large volume of gold transactions by the Fund resulted mainly from the payment of increased gold subscriptions and from purchases of gold from South Africa. Further, the Fund transferred the equivalent of $63 million from its general deposits to its bar gold holdings and reacquired the equivalent of $400 million of gold from the United States as a result of disinvestment of part of its investment in U.S. Government securities. The Fund used gold to replenish its holdings of currencies in a total amount equivalent to $920 million. At the end of 1970 the Fund’s bar gold holdings amounted to the equivalent of $4,339 million, compared with bar gold holdings equivalent to $2,310 million a year earlier. In addition, the Fund held in its general deposits of gold the equivalent of $196 million, as well as the equivalent of $400 million of gold, which had been sold to the United States for investment in U.S. Government securities and which could be reacquired by the Fund.

Most countries experienced declines in their gold holdings during 1970 in an aggregate net amount equivalent to $1.9 billion; only ten countries showed increases in their holdings in amounts in excess of $1 million. The latter countries included Japan, Switzerland, the Netherlands, Portugal, and Turkey.

During the first quarter of 1971, the total of official gold holdings decreased by $35 million, while the Fund’s bar gold holdings increased by $65 million. The official gold holdings of countries declined by $310 million during the first quarter, but increased during April 1971 as a result of the Fund’s sale of the equivalent of $264 million in gold in replenishment of its currency holdings.

United States

The gold holdings of the United States declined by $787 million to $11,072 million during 1970 and by a further $565 million in the first six months of 1971. In 1969 the gold holdings of the United States increased by $968 million (Table 42).

The decline in the U.S. gold stocks during 1970 was accounted for largely by transactions with the Fund. In total, the United States transferred the equivalent of $838 million to the Fund’s bar gold holdings (including its increased gold subscription), while the Fund sold to the United States the equivalent of $134 million in replenishment of its holdings of U.S. dollars (excluding mitigation operations described below). U.S. transactions with the Fund thus accounted for the equivalent of a net amount of $704 million of the fall in U.S. gold reserves during 1970. However, the transfers from the general deposits of gold and the disinvestment and reacquisition of $400 million of gold correspondingly reduced the total U.S. gold liabilities to the Fund.

The United States also sold $548 million of gold to 72 countries in order to enable these countries to pay their increased gold subscriptions to the Fund. However, in mitigation of these gold sales by the United States, the Fund simultaneously sold an equivalent amount of gold to the United States in replenishment, so that there was no net change in U.S. gold stocks on this account.

Excluding these sales of gold to members for purposes of paying increased gold subscriptions to the Fund, U.S. gold transactions with national monetary authorities were substantially smaller in 1970 than those in the previous year. The United States purchased $120 million of gold from abroad, compared with purchases totaling the equivalent of $1,167 million in 1969. Of the $120 million, $51 million was bought from Spain, $25 million from Kuwait, $21 million from Burma, and $12 million from Turkey.

Sales of gold to national monetary authorities amounted to $203 million in 1970, which was slightly larger than sales of $200 million in 1969. The main recipients were China, which bought $60 million of gold to pay its original gold subscription to the Fund, the Netherlands ($50 million), and Switzerland ($50 million).

The amount of gold held under earmark by the Federal Reserve Banks for accounts of foreign governments, central banks, and international organizations increased in 1970 by $615 million, to $12,926 million.

United Kingdom

During 1970 the United Kingdom imported some 30.5 million ounces of gold bullion, equivalent to $1,066 million, compared with bullion imports amounting to 13.6 million ounces ($478 million) in 1969. More than 90 per cent of the imports in 1970, the equivalent of $967 million, came from South Africa, and these imports amounted to about 86 per cent of South Africa’s total production. This was in contrast to 1969, when South Africa sold the bulk of its newly mined gold on the Zurich market and exported only $191 million to the United Kingdom. As in 1969, no imports of gold from the Soviet Union were reported by the United Kingdom in 1970.

Exports of gold from the United Kingdom in 1970 amounted to 18.5 million ounces, equivalent to $646 million, compared with total exports of 11.2 million ounces ($393 million) in 1969. The equivalent of $146 million was exported to Bahrain, Kuwait, Qatar, and the Trucial States; this reflected, in particular, the prosperous trade between Dubai and the gold markets of the Far East. The equivalent of $227 million was shipped to Europe, of which $102 million was exported to France and $76 million to Switzerland. Japan imported the equivalent of $80 million of gold to satisfy its domestic industrial and artistic demand for the metal. Singapore, the fifth largest importer of gold from the United Kingdom, imported the equivalent of $73 million in 1970 to facilitate a further expansion of operations on the free gold market in Singapore; in 1969 imports amounted to $7 million.

South Africa

South Africa sold the equivalent of $1,603 million of gold during 1970. Of this total, gold production accounted for the equivalent of $1,128 million, official gold holdings fell by $449 million, and stocks held by the gold mining industry fell by about $26 million. The distribution of sales was $914 million on private gold markets, $48.5 million to national monetary authorities, and $640 million to the Fund.

Gold Prices and Gold Markets

During most of 1970 and up to the end of April 1971, gold market activity was concerned mainly with meeting traditional consumer and hoarding demand; speculative activity was relatively light except for a few weeks in April and early May and in late September and in October 1970. In contrast to most of 1969 when they were generally falling, gold prices were relatively stable during the first eight months of 1970 and then rose through the early part of May 1971. In general, the increase in gold prices during the latter part of 1970 and the first four months of 1971 reflected the revival in the demand from the market, following the substantial rundown in stocks that was characteristic of the first eight months of 1970.

Conditions changed quite markedly as a result of uncertainties in the foreign exchange markets in April and early May 1971; the gold markets became unsettled, speculative activity increased, and prices rose to their highest levels since August 1969. As shown in Chart 28 the fixing price of gold in the London market fluctuated between a low point of $34.75 a fine ounce, fixed on January 16 and 19, 1970, and a high of $41.20 a fine ounce, fixed on May 14 and 18, 1971. The average fixing price in London for 1970, at $35.96, was $5.15 an ounce lower than the average for 1969. During the first six months of 1971, the average fixing price was $39.19.

London and Zurich Markets

With the exception of a small and partly seasonal rise between the end of March and mid-May 1970, the price of gold in London and Zurich was relatively stable, at close to $35 a fine ounce, until the last week of August 1970. On January 16 and 19, 1970 the price in London fell to $34.75 an ounce, the lowest price since the London market was reopened in March 1954. Prices remained stable within 1 per cent of the official price of $35 an ounce until mid-August 1970.

Thereafter, activity in the gold markets increased and prices generally rose. Demand for industrial and artistic use—particularly from North America—recovered, and substantial shipments were made to countries in the Middle and Far East. As a result of higher demand, the price increased to $36.35 an ounce by the middle of September. During October, and especially in the latter part of the month, prices rose sharply, largely as a result of increased speculative demand; between October 5 and 27 the price increased on average by 6.9 cents a fixing, reaching a high of $39.19 an ounce. Largely in reaction to the sharpness of the rise in prices during October, demand for gold slackened and prices fell; between October 27 and November 5, 1970 the price of gold fell by $2.30 an ounce to $36.75. Until the middle of January 1971 the price was stable at around $37.50 in quiet market conditions.

The rise in gold prices during the first four months of 1971 reflected moderately heavy demand for gold while supplies were limited largely to the sale of current new production. The uncertainty that characterized the foreign exchange markets during late April and early May 1971 led to heavy buying of gold, particularly in Western Europe, and prices rose by about $1.50 to $41.20 an ounce, the highest level in almost two years. Subsequently, prices fell slightly and at mid-July were fixed at just over $40 an ounce.

Paris Market

Since the reintroduction of exchange control in November 1968, private imports and exports of gold have been prohibited in France. However, the price of gold in the Paris market has generally moved in a similar fashion to the price in the London and Zurich markets. On occasion, for example in April 1970 and again in September-October 1970, the price for the 12.5-kilo standard gold bar has fallen below the price in London and Zurich. The price in Paris has, however, been generally above the comparable price in London and Zurich by 2 per cent on average, but the size of the premium in the latter part of 1970 and in early 1971 was considerably smaller than formerly.

Conditions in the Paris gold market were calmer in 1970 than in the previous year, following the comparative strength of the French franc on the foreign exchange markets and the improvement in the French balance of payments position. Up to the end of July 1970, fluctuations in the price of gold were influenced by the varying size of the discount on French banknotes quoted abroad. In early August 1970 the Bank of France announced that henceforward it would purchase French banknotes from foreign commercial banks, thereby diminishing the discount. As a result of this measure, the price of the 12.5-kilo bar fell sharply, and prices have been closely aligned with those in the other markets.

The price of the 1-kilo ingot has been quoted close to the price of the standard bar. Prices fluctuated between a low of $35.26 an ounce on March 12, 1970 and a high of $38.77 on October 27, 1970. During the previous year, prices had fluctuated within a range of $12.76 an ounce. Calmer trading conditions were also reflected in lower average turnover; during 1970 average daily turnover amounted to about 270 ingots, compared with 530 ingots in the second half of 1969.

Activity in gold coins was also relatively light during 1970. For example, the average daily turnover of the napoleon (F 20 piece) was about 4,950 in 1970, some three fourths of average daily turnover in 1969. The price of the napoleon during 1970 fluctuated between the equivalents of $51.10 an ounce and $63.10. During the first half of 1971, the average daily turnover increased to 5,200, and prices rose by about $5.19 an ounce from the end of 1970.

Other Markets

The New York gold market was relatively inactive until the third week of August 1970, conditions largely reflecting the sluggishness of domestic economic activity. The price of gold in New York has moved closely with the prices in London and Zurich, though at a premium of between 40 and 50 cents an ounce.

Gold bar prices in Beirut also moved closely with those in London and Zurich. The premium in Beirut, which reflected largely costs of transportation and insurance from London and Zurich, was generally between 10 and 30 cents on the London price. On occasion, however, the Beirut price fell below the London price.

In April 1969 a gold market in which non-sterling area residents could freely buy and sell gold was established in Singapore. By early 1971 this market had developed into the largest international gold market in the Far East. The import of gold into Singapore is subject to a levy of $0.98 an ounce, which is smaller than levies in other gold markets in the area, an important factor in the rapid growth of the market. Total imports of gold are estimated at about $150 million (valued at $35 an ounce) in 1970, compared with about $35 million in 1969. Imports from London account for about half of the total. Exports of gold from Singapore are largely directed to neighboring countries, especially Indonesia.

The price of gold in Singapore follows the trend of prices in London, with a local premium of usually less than 5 per cent. During 1970 prices fluctuated between $37.02 an ounce and $40.56. At the end of June 1971 the price was quoted at $41.45. The quoted price of gold in Singapore is slightly higher than gold prices in Hong Kong, but the difference narrowed considerably during 1970 and early 1971.

Rigid restrictions on both the import and export of gold have insulated the gold markets in India from other international gold markets, and the price in India has been subject to special local influences. The price of primary gold in Bombay, the country’s biggest market, increased sharply after October 1970, reflecting a seasonally heavy demand and relative scarcity of supply. The rise in the price continued virtually throughout the latter part of 1970 and the first half of 1971, until the all-time high of the equivalent of $82.11 a fine ounce was reached on May 24, 1971, or over twice the price in the London market. At the end of June 1971 gold was quoted at the equivalent of $76.10 a fine ounce, a premium of $36.00 over London.

Gold Subsidy Programs

The gold subsidy programs of the Philippines and South Africa, discussed in previous Annual Reports, have continued in operation during the past year.4

Australia consulted the Fund with regard to the extension for a period of three years of the Australian gold subsidy scheme under the Gold Mining Industry Assistance Act. Canada also consulted the Fund with respect to the extension of the application of its Emergency Gold Mining Assistance Act for a further period of two and a half years to June 30, 1973. The Fund has deemed these extensions to be not inconsistent with the objectives of the Fund statement on gold subsidies dated December 11, 1947.

Table 39.Gold: Value of World Production, 1940, 1945, and 1964-First Quarter 1971 1(In millions of U.S. dollars at US$35 a fine ounce)

2Minus sign denotes net outflow of gold from the International Monetary Fund, the Bank for International Settlements, and the European Fund.

3Excluding gold placed on general deposit in London and New York totaling $278 million at the end of 1967, $272 million at the end of 1968, $259 million at the end of 1969, $196 million at the end of 1970, and $188 million at the end of March 1971.

Source: International Financial Statistics and Fund staff estimates.

1Excluding CMEA countries, mainland China, etc.

2Minus sign denotes net outflow of gold from the International Monetary Fund, the Bank for International Settlements, and the European Fund.

3Excluding gold placed on general deposit in London and New York totaling $278 million at the end of 1967, $272 million at the end of 1968, $259 million at the end of 1969, $196 million at the end of 1970, and $188 million at the end of March 1971.

Table 41.Gold: Marketed Stocks and Distribution by Use, 1958-Firs Quarter 1971(In millions of U.S. dollars at US$35 a fine ounce)

1Excluding sales of gold to Fund members for the purpose of enabling members to pay their increased gold subscriptions to the Fund and also excluding equivalent sales of gold by the Fund in replenishment, which mitigated the gold losses of the United States.

2This largely reflects the U.S. share in the then gold pool arrangements, for which the Bank of England acted as agent.

Source: U.S. Treasury Department, Foreign Gold Transactions.

1Excluding sales of gold to Fund members for the purpose of enabling members to pay their increased gold subscriptions to the Fund and also excluding equivalent sales of gold by the Fund in replenishment, which mitigated the gold losses of the United States.

2This largely reflects the U.S. share in the then gold pool arrangements, for which the Bank of England acted as agent.